"Christmas Joy" is the ninth episode of season three. After Shawn and Gus help a little girl get a mall Santa out of jail in time for Christmas, they realize their clients are in fact grifters (con men) who have a big score planned. Helping them with their investigation is Gus' sister Joy, in town for the holidays and looking to repeat a one-time fling she had with Shawn, who is determined to keep his best friend from ever finding out.

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Eight-year-old Brittany comes into the Psych office in desperate need of help. She wants to hire Shawn and Gus to get Santa out of jail. She saw him being arrested at the mall and they need to get him out by Christmas Eve, so he can deliver all the presents. She is so distraught that they agree to look into it as soon as they stop by the Gusters' to see Gus' big sister Joy, who has come home for the holidays. Gus is excited to see her but Shawn's feelings are mixed. He and Joy had a secret one-time fling and he doesn't want history to repeat itself behind his best friend's back. But Joy would love to pick things up where they left off and so jumps at Gus' offer for her to tag along on their Santa investigation.

At the police station, they find out that Santa is being held as part of a fight at the mall that left a man unconscious. They are keeping all participants in custody until they figure out which one to charge with assault. Juliet takes the guys down to the holding cell where Shawn quickly sees that their Santa only has defensive wounds, but another suspect is a Krav Maga expert whose hands are registered deadly weapons. He confesses to hitting the victim, but says he only did so to stop him beating up Santa. Juliet releases Santa, and Shawn and Gus have saved Christmas for little Brittany. On the way out of the station, Shawn finds out that his apartment is being fumigated. Since Henry has some old buddies in town, he can't stay there and needs to find a place to crash. Joy happily offers up the Gusters' house. Shawn balks, but Gus insists. Before Shawn can protest further, they see little Brittany yelling at 'Santa' who, it turns out, is actually her father. She tells him they only have three days left and not to screw up again. Shawn and Gus were conned. Juliet runs Santa's prints and tells them that he is noted con man Carl Wilcox. Shawn realizes he and Brittany must be planning a job, and they head to Santa's Village to investigate.

Shawn and Gus confront Carl and Brittany at the mall, where Carl, dressed as Santa, screams assault and draws attention. Shawn and Gus are then escorted out by the security guard, but on the way, Shawn sees Santa's Elves inputting their guests' home addresses into a computer in order to mail their pictures. That night at the Gusters', Shawn succumbs to temptation and leaves his room to find Joy. But he is nearly caught by Gus and ends up hiding in the basement, where he runs into Bill, who is supposed to be working the night shift. Bill confesses that he lost his job a month ago but hasn't been able to bring himself to tell his family. He swears Shawn to secrecy.

The next day, with Shawn and Gus banned from Santa's Village, Joy agrees to go undercover as an elf to try to find out what Carl and Brittany are up to. They discover that Theodore "Ted" Meltregger, the security guard, was Carl's reference for the job, and that Carl often asks the kids if they are going to be traveling over the holidays so Santa knows where to bring the presents. Shawn figures out that Carl and Ted are planning to rob the empty houses on Christmas Eve, which is why Brittany needed Carl out of jail by then. They call Lassiter and Juliet down to the Village, where they find Ted dead in the Nativity scene. The cops arrest Carl, but he insists he could never kill Ted. They had been partners in long cons for years, but violence was never their thing. He's afraid that whoever killed Ted will be coming for he and Brittany next. He doesn't trust the cops and asks for Shawn and Gus' help. He tells them both he and Ted owed their bookie Frank ten thousand dollars, which was why they were going to do the robberies.

Shawn and Gus split up to find Frank. Shawn finds him first but, not only does Frank have an alibi, he also had no motive. Dead men don't repay debts. On his way out, Shawn runs into Winnie, who confesses that she had a dream, which led her to bet and then lose all the Christmas money. She, too, swears Shawn to secrecy. He agrees, but tells her he feels Bill will not hold it against her for keeping a secret. The next morning as the family is gathered to open presents, both Winnie and Bill come clean. The Gusters immediately forgive each other, which inspires Joy to confess her and Shawn's past and their feelings for each other. This confession does not go as well and soon the whole family turns on each other as Gus kicks Shawn out of the house.

Shawn heads down to the police station where Juliet has pulled Carl and Ted's court records and discovered that they had a third partner, Moncrief Johnson, who they turned state's evidence against, due to his violent streak. It was Johnson who was knocked unconscious in the brawl at the mall, where he was stopped as he attacked Carl the Santa. Johnson was released from the hospital the same day Ted was killed at the mall. Shawn realizes he is going after Carl again and races out to warn him as Juliet calls Lassiter. Johnson arrives at Carl's apartment, and as he approaches 'Santa' with a knife, his victim spins around, revealing it to be Lassiter dressed in a Santa suit, gun drawn. With Johnson in jail, Shawn goes back to the Gusters' to apologize. Already long past their dispute, they forgive Shawn right away, and give their blessing for him to join them for Christmas dinner. After all, he's family, too. Later, after all of Henry's guests have gone, Shawn arrives to play their traditional Christmas gift exchange guessing game and extends his winning streak once again.